WILLIAM HILL PLC FINAL RESULTS ANALYST PRESENTATION 24 February 2017 - - PDF document

WILLIAM HILL PLC FINAL RESULTS ANALYST PRESENTATION

24 February 2017

Philip Bowcock, Interim CEO

SLIDE 1: TITLE SLIDE Good morning, everyone. Thank you for joining us. I’ll do a quick intro first and then hand over to Mark Summerfield, our Interim CFO, for the numbers. I’ll then update on our progress and priorities. SLIDE 2: OVERVIEW Looking back over 2016, we’ve achieved a huge amount and made good progress across the four priority areas I set out six months ago. With all the heavy lifting that has been done, we’re set up to be in a far better position in 2017. And we’ve have had an encouraging start to year. Sports results have been good. Much more importantly, in the UK we made good progress during the second half of 2016 and both sports wagering and gaming net revenue is showing sustained improvement into this year. In financial terms, we ended the year with a strong balance sheet at 1.8x net debt to EBITDA. Though EPS was lower, the Board believes the actions we’ve taken will deliver an improved performance and have, therefore, maintained the dividend flat at 12.5p per share. SLIDE 3: A BUSY YEAR FOR ALL FOUR DIVISIONS The teams have stayed focused and delivered a huge amount as you can see from this list. In my view, Online has turned a corner thanks to all the work on product, UX and marketing. There’s more we want to do but the signs are increasingly positive. And we’re now attracting top quality new hires from inside and outside the sector into Crispin’s leadership team, including three key senior hires in marketing, gaming and technology. For Retail, what I’d call out is the modernisation programme, and I won’t spare Nicola’s blushes. It’s been a top-to-bottom restructuring of Retail’s management in a way that increases management attention on the shops and the customer experience, as well as mitigating the National Living Wage in the coming years. It’s one of the most significant changes Retail has undergone in the last decade and has been delivered with minimal disruption. No mean feat. So, thank you, Nicola and to any of her team who are listening to today’s presentation. Australia is now going well and the US continues to perform very strongly. So everyone in the business is feeling considerably more confident after the hard work over the last few months. Now, I’ll hand over to Mark for the numbers.

Mark Summerfield, Interim CFO

SLIDE 4: FINANCIAL REVIEW Good morning, everyone. SLIDE 5: GROUP INCOME STATEMENT I’ll start with the Group income statement. As Philip said, we were tracking at the top end of our guided profit range until we were hit by sports results in December, after a weak November as well. This hurt all four divisions and in December alone reduced profits by about £18m. Overall, then, while net revenue and profit before interest and tax both ended the year up 1%, adjusted operating profit is a better indicator of our true performance and this was down 10%. Across the Group, reporting on a constant currency basis would have no significant impact. For example, net revenue would have been down 1% rather than up 1%. Exceptional items included just under £10m of corporate transaction costs and just over £10m of reorganisation costs, including the Retail modernisation programme. Operating and non-operating adjustments differ in quantum from last year mainly due to the financial instrument used for the investment in NYX. A £9.9m loss arose on fair valuing the derivatives related to our investment and £3.2m of interest income arose on the loan element, derived using an effective interest rate. Net finance costs were higher as we incurred the cost of the new £350m bond from May ahead of paying

• ff the existing £300m bond in November. As the coupon on the new bond at 4.875% is considerably

lower, net finance costs will come down by around £11m in 2017. Our effective tax rate on adjusted profits is 9.3%, lower than the 15% guided due to a range of small reasons such as the impact of tax rate changes that were announced in the Budget but enacted in September, prior period adjustments and the movement on provisions for uncertain tax positions. We expect the effective tax rate to be 14% in 2017. Overall, then, adjusted EPS was down 10%. But the dividend for the year remains flat at 12.5p per share, a pay-out of 56% of adjusted EPS. SLIDE 6: ONLINE INCOME STATEMENT Turning to the divisions. Online saw a 2% growth in amounts wagered. The core markets of the UK, Italy and Spain were up 5% and ‘Other markets’ were down 11%. For reference, the UK was up 2%. In Gaming, net revenue was down 4% with core markets down 5%. The UK was down 8%. However, there was good growth in Italy and Spain. We launched Vegas-style content in Italy and had a part-year benefit from the launch of slots in Spain in June 2015. Other markets were up 2%.

At the gross win margin, you can see the impact of the sports results in the last two months. We reported gross win margin of 7.7% for the first ten months. December delivered a margin of only 3.6%. Looking at costs. Employee costs were up 21%. This reflects our ongoing investment in the technology, customer experience, business intelligence and international teams. Marketing was lower in H2, as we had the EUROs in H1, and then started to optimise spend and address the customer experience issues. FVAs were 0.9% of amounts wagered overall, down from 1.1% in H1 as we tackled bonus abuse. The KPIs highlighted show the profile we were expecting given the changes we’ve made. By focusing on profitable business we lowered the number of actives but improved the average revenue per user. New accounts are lower as we’re not recruiting customers who give a negative return and so the CPA is

• higher. However, as we start 2017 the top-line trends are encouraging, and Philip will talk to these in a

moment. Looking ahead, from August, we’ll be charged Point of Consumption tax on gaming free bets. That’s likely to cost us around £3.5m this year, around £8m on a full-year basis. And the Government plans to extend the horseracing levy to online operators and to charge a rate of 10%

• f gross win from April. On current levels, that would cost Online around £6-7m on a full-year basis, with

a small benefit flowing through to Retail. The main hurdle for the Government is EU State Aid clearance and we’re awaiting the outcome of that stage of the process. SLIDE 7: RETAIL INCOME STATEMENT As previously highlighted, Retail wagering was down with declines in horseracing and greyhounds not sufficiently offset by football. In horseracing, one factor in the fall in wagering was the high gross win margins on Tier 3 horseracing in the first three quarters, which reduced recycling. Margin normalised in Q4. We also now have pictures from South African racing back in the shops and this is improving performance. Racing is a big focus for our Sportsbook strategy in 2017. The SSBTs are now performing well, with 2,000 of our own machines and 800 of BGT’s across over 80%

• f the estate. In Q4, where shops had SSBTs, they accounted for 7% of total wagering and nearly 30% of

football wagering. The proprietary route is the right one to support our Omni-channel strategy. But given the number of SSBTs in the market, it’s likely that we saw less growth in football during our roll-out. Recent trends show we’re getting our offering right and performance improved throughout the adoption

• curve. The machine week average gross win in 2016 was around £600 but in Q4 it was over £720 with

further improvements in 2017. Superficially, the gross win margin at 17.6% looks normal but we were at 19.0% in H1 so you can see the second half was significantly below par. Our margin was just 15.9% in Q4, normally one of our bigger quarters. Gaming was good all year, up 6%. We launched 50 new games and increased the yield with B3 increasing from 31% to 34% of the mix. In Q4, growth was around 4%, which seems a reasonable run rate for the coming year.

Overall, costs are up 2%. The employee costs include some bonus payments this year, plus £1.5m of National Living Wage costs in addition to an underlying increase of just under 2%. Going forwards, I would expect employee costs to increase by around 2-3% a year as the modernisation programme is largely offsetting the substantial additional National Living Wage increases we were otherwise facing. Underlying property costs were broadly flat, with the reported number benefitting from utility, rent and rate adjustments that arose in the year. Property costs in 2017 are expected to increase some 2%. Content costs continue to rise through contracted increases and the decision to take more fixtures. We anticipate content costs increasing 3-4% in 2017. SLIDE 8: AUSTRALIA P&L The numbers I’ll talk to for Australia and the US are in local currency. Australia saw 18% growth in amounts wagered. Within that, in-play accounted for about half of the growth, contributing 11% of wagering before the regulations changed in October. We’ve moved from Click to Call to our Quick Code product and we’ve retained more of the betting than we expected. Currently, in-play accounts for about 6% of wagering levels. Gross win margins were impacted by horseracing results and came in slightly below our normal range. Looking ahead, the margin may change as the product mix shifts but, for now, we believe normalised margins remain somewhere between 10% and 11%. Marketing investment was $9m higher, including free bets. We’ve invested significantly in the teams supporting product and technology during the year but offset those cost increases by offshoring back-office activities to Manila, so overall costs were down 1%. In 2017, we’re increasing marketing and also investing $8m in additional streaming, with exclusive rights to New South Wales racing being a key part of our racing strategy. Looking at the KPIs. We’ve seen strong growth in acquisition, up 19% year-on-year. This seems at odds with the lower number of actives. However, the fall in actives reflects the migration

• f the Tom Waterhouse and Centrebet customers over to the William Hill brand.

The migration meant that some customers moved to using a single William Hill account rather than up to three accounts across the brands. Post migration we’ve seen an improvement in average revenue from retained customers as they’ve enjoyed a broader product range and better UX than before. And just to flag that South Australia’s Point of Consumption tax applies from July and will cost us $1-2m in 2017. SLIDE 9: US The US continues to grow strongly. We launched a new app during the year, which has been well received. Mobile wagering grew 33% in the year, accounting for 52% of overall wagering. We added yet another way for customers to deposit into their mobile accounts with the launch of pre-paid cards and have rolled that out to all users of the new app.

Gross win margins reflect some very poor American football results in Q4 but the underlying volumes meant we grew our way through that. With costs well controlled, we saw a 39% increase in operating profit. SLIDE 10: CASH FLOW AND NET DEBT Looking at the cash flow, the major items during the year have been well flagged:  Investments in capex, NYX / OpenBet and Grand Parade;  Launching a new bond and paying off an old one; and  Returning £109m in dividends and £95m through a share buyback programme. Major items within capex included: £17m in Retail to develop SSBTs and our Omni-channel strategy; £17m and £10m on Product and Trading in Online and Australia respectively and £4m on Data Management. In 2017, capex will be in the £90-110m range as we accelerate investment to support the transformation. That’s it from me. SLIDE 11: HEADER SLIDE – OPERATING REVIEW Thank you, Mark. SLIDE 12: REGULATORY UPDATE Before we get into the more interesting stuff about what’s happened and what we’re doing next, let’s do a regulatory update. On the Triennial, we made a submission to the Government in December. Currently, we expect to hear back in late spring and indications are that there will be a further consultation on their proposals, taking us through to late summer or early autumn. We continue to engage constructively, and we’re focused on ensuring Government clearly understands the growing evidence base as it makes its decisions. On the 4th EU Money Laundering Directive, we are still waiting to hear from the Government whether LBOs will be included. This is due to be implemented in June. In Australia, the revisions to the Interactive Gambling Act aren’t material to us because we’ve already changed our in-play approach under our Northern Territory licence provisions. However, the National Consumer Protection Framework is likely to address the question of credit betting, plus consumer protection measures, so we’re keeping close to that process. In the US, there are a number of states now looking to challenge PASPA, including New Jersey appealing the ruling last July. The Supreme Court has asked the incoming Solicitor General for their views on the appeal, materially increasing the likelihood of the case being heard. It’s also interesting to hear more positive comments from the Commissioner of Major League Baseball recently, recognising that betting on games is a form of fan engagement and can fuel the popularity of the sport. We are actively engaged in the various routes that are being pursued – at state or federal level – to drive towards regulatory or legislative change.

SLIDE 13: PROGRESS AGAINST OUR FOUR FOCUS AREAS As I outlined at the interims, we’ve been focused on four focus areas. I’ll update on our progress and talk about what’s coming next. SLIDE 14: MAINTAIN THE PACE OF ONLINE’S TURNAROUND Starting with Online. We said we’d deliver Sportsbook improvements in H1, Gaming in H2, with UX enhancements and a refocusing of marketing spend in the second half as well. Crispin gave many of you a good overview in October so I’ll update on what’s happened since then. For Sportsbook, trends have further improved since our November update. You’ll remember UK wagering was down 0.7% in H1. We were +4% in November. And so far in 2017, it’s up 10%. The number of Sportsbook actives on a Saturday is looking particularly encouraging and, right now, we’re working on the last pieces of the front-end transition for the UK, releasing our Android app and gradually moving our desktop traffic. On Gaming, we’ve redesigned the Live Casino website and app, which led to a good increase in actives. The new Vegas app, built by our new team in Krakow, has been well received since its release in January and cross-sell is progressing. There’s more to do but, since the beginning of the year, we’re back into

• growth. UK gaming net revenue was down 8% in 2016 but is currently up 8% so far this year.

So Sportsbook is looking good and gaming is getting better. The customer funnel is about continuous improvement. It’s the 0.1% changes that, with our scale, have a disproportionately large benefit. Sportsbook conversion improved sharply during Q4 as several key initiatives landed, such as the new targeted landing page and improved registration form. Just to give you one statistic, our registration conversion rate improved 17% between H1 and H2. We’ll apply the same on-boarding experience to Gaming during Q2. On marketing:  we’ve seen some encouraging early results from programmatic; 

• ur new offers are doing well, particularly our High 5 racing offer, which is our first headline
• mni-channel offer across Online and Retail; and

 we ran some successful gaming campaigns. We’re seeing a sustained improvement in the quality of our new accounts across key acquisition channels in terms of both revenue contribution and retention rates. The value of new accounts in Q4 was 29% higher than it was in Q4 2015. SLIDE 15: DRIVE INCREASED EFFICIENCIES ACROSS THE GROUP We’ve made real progress on our efficiencies review. We did a top-down review before the year-end to determine the size of the prize and are in the final stages of the detailed bottom-up validation with execution plans. We originally said we were targeting £30m. That’s now at least £40m of efficiencies that we can achieve by the end of this year.

We’ll make most of the changes in 2017 but, given the scale of the programme and to ensure we’re able to focus on growth at the same time, some changes will be made in 2018. SLIDE 16: DELIVER THE TECHNOLOGY ROADMAP Turning to technology. I think you’ve seen a version of this technology stack diagram before. What you can see is we’ve now got in place what we need for the UK market: that’s the product platforms, control of our front-end and extensive customer data. Our front-end platform has enabled the rapid changes we’ve made to Sportsbook, Gaming and the customer funnel. And the proprietary SSBTs were only possible because of the front-end control we now have. At the same time, adding the Grand Parade team has substantially improved our capability and increased

• ur capacity, and we’re really pleased with the products they’re producing for us.

Our strategy is either to own or to have control of our technology roadmap, particularly in the area of Sportsbook where we have a USP. We own the elements that most differentiate what we give our customers. While we don’t have to build it all in-house, we need to control the direction we’re taking, and that’s what we’re achieving with OpenBet. SLIDE 17: REFOCUS THE INTERNATIONAL GROWTH AND EXPANSION Outside the UK, we’re growing well now in Australia, the US, Italy and Spain. We are delivering great product innovations faster than anyone in Australia and we’ve completed the migration of Centrebet customers to the William Hill brand. Australia is however a tough space, highly competitive, with increasing costs, especially media. So while we’re investing heavily in William Hill as our core mass market proposition, we’re also testing a niche price-led strategy under the Centrebet banner targeted at higher staking customers. In the US, we’re rapidly gaining market share. We’ve opened five new sports books to take us up to 56%

• f the market – or two-thirds of books outside the Strip.

Our share of sports handle is up from 18% to 21% and our share of hold is up from 21% to 26% as we

• perate at a higher margin.

So we’re on track to get to the 30% market share that Joe said was our target when he presented to you last April. Our new app has gone down well and mobile is now 52% of our wagering levels, up from 48% in 2015. The Global Trading Platform continues to give us more in-play product, we’ve brought virtual racing to Nevada, which is now in 12 of our locations, and we’re getting ready to expand into a third state with a new deal to run a race book in Iowa for Caesars and to add our 109th sports book in Nevada. In Italy and Spain, we’ve had further growth, with Spain in particular benefiting from the addition of slots. The two markets together made £1.8m profit in the year. SLIDE 18: 2017 PRIORITIES TITLE SLIDE So that’s what we’ve delivered. Turning now to what’s ahead.

SLIDE 19: CUSTOMER FOCUS Everything starts with what’s important to our customers – although much improved our online customer experience is not yet where we want it to be. If I take three soundbites from research we’ve done recently, it’s very clear what customers are looking for. They tell us:  “Save me time and effort” – because we’re all used to ‘one-click’ ordering now;  “Make everything enjoyable” – this is supposed to be fun after all; and  “Make it personal” – make me feel valued and rewarded not just one among millions. SLIDE 20: INVESTING FOR GROWTH – OUR APPROACH (1) Keeping this really simple, we will invest in three enablers – our product, our marketing and our

• technology. This means a relentless focus in all three to give customers a quick, easy, fun and personal

experience both in Retail and Online. Then it’s about reaching as many customers as possible. The UK remains our absolute priority given our scale and sophistication in the market. It’s the biggest market and because of the strength of our brand it gives us our biggest near-term return. But what we do in the UK we need to be able to leverage across multiple markets and we need to find a way to do that economically in markets that are much smaller than the UK. The measures of that are also very simple: we want to grow market share in the UK and we want to increase our revenues from international markets. And that’s underpinned by re-investment from our transformation programme. SLIDE 21: INVESTING FOR GROWTH – OUR APPROACH (2) So, we’re investing in our three enablers: For product, we’re increasing our technology headcount further with another 100 people in product development and focusing on data-led personalisation; For marketing, we’ve already committed to reinvesting the efficiencies from digital marketing optimisation back into digital marketing. At the same time, we’re going to increase Online’s budget; and For technology, we’re getting underway with a three-year programme to build one technology platform that the whole business can use. In marketing, we have not had product launches to support while the front-end platform was being built so now we have the right product we will invest. I anticipate Online’s marketing spend will be £20m more in absolute terms. But if you include £10m in 2017 of the digital marketing benefit we get this year and the £9m that went into the EUROs that’s staying in this year, there is a real increase of c£40m. The global platform benefits both the UK and international growth. It will enable us to bring our innovations to every market we’re in, it’ll give us a flexible platform that works for smaller markets and it’ll make us more efficient because we won’t have to maintain multiple platforms across multiple territories.

It’ll be flexible by being broken down into components and it’ll be a collaborative project between William Hill and OpenBet. And, remember, we can ultimately bring the platform in-house if we want to. The cost is about £30m over three years. It’s not big bang so some benefits will start to come through in 2018. SLIDE 22: STRATEGIC PRIORITIES So what will this mean in the UK and internationally:  Growing UK market share;  Growing international revenues; and  Delivering the technology and transformation projects. SLIDE 23: GROW UK MARKET SHARE BY DELIVERING A GREAT CUSTOMER EXPERIENCE First, it’s about the UK, which remains our primary one. This is about what Retail and Online are delivering both individually and together. Getting the basics right. Delivering great product and UX. Using what we know about our customers to give them an ever more personalised experience. Here’s an insight into what we’re currently delivering. We’ve got a big push in H1 on player funnel optimisation. We’ll transform the quality of the services customers get and get more efficient at the same time. In product terms, we’ll finish our gaming upgrade – and we’ve already taken a big step there by rolling out the single wallet on 7 February. Now, all aspects of the OpenBet and Playtech wallets are joined up – a seamless customer experience. We’ve got more sports products to roll out, like #YourOdds which gives customers a great personal experience. We’re now pushing fast on the Omni strategy. We’ve got 2,000 proprietary SSBTs out there but that’s just the start of the journey. We’ll add more product, with some very exciting additions. And we’re trialling a new smaller format, which some of you may have seen at ICE two weeks ago. We’ve got the Bet Tracker app. And we’ll have an Omni wallet before the end of the year so customers can access their Online accounts to deposit, withdraw and transact through the SSBTs. SLIDE 24: INTERNATIONAL GROWTH So the first priority is UK, the second is international. In Australia, we’ve got an opportunity to be a seriously disruptive, challenger brand with good traction and rapid delivery of new products. I was down there last month with Tom and the team. We’ve got the product and decent technology for the near term. We’re going to invest more in marketing to grow market share further and faster, increasing the budget by about a third. This is a tough market. But it’s a good one. And we’re going to fight for market share. The US is a great business. Joe and his team have done a brilliant job of building our brand presence, growing market share and getting our voice heard, and he’s got more plans for mobile.

And Joe’s actively involved in the conversations from the federal to the state level about how sports betting could be legalised. Clearly, the US political environment is in a state of flux. But we’re as well placed as we could ask to be. In Italy and Spain the markets are growing well but clearly, short term, our focus has to be on the UK. So we will ride the growth by continuing to invest in marketing. And for the Rest of the World, the optimal solution is to have a global platform. But while we’re building that there are near-term opportunities we can pursue without diverting away from the UK focus. And we’ll move to a global technology platform when it’s ready. SLIDE 25: KEY PROJECTS – TECHNOLOGY AND TRANSFORMATION Third, then are two key projects underpinning these two strategies. Having the right technology and transforming the organisation. For technology, as I said earlier we’ve got the tech we need for the UK. The key project is the global tech platform with OpenBet. That will take us even further in the UK, make our existing international businesses more efficient and enable us to move into other international markets. And the transformation programme is a near-term project that will make us more efficient and provide capital for us to reinvest. SLIDE 26: TRANSFORMATION PROGRAMME TO DRIVE INCREASED EFFICIENCIES It’s about making sure our organisation is fit for purpose in delivering these goals. William Hill has grown in the UK rapidly and organically for eight years and the Online and Group functions have never been reviewed in that time. SLIDE 27: TRANSFORMATION PROGRAMME: PRIORITY AREAS As I said, we’re looking to deliver £40m of efficiencies. Let me give you a concrete example of what we’ll be changing. We’ve highlighted digital marketing before because it was the most advanced area of the programme. We said we’d deliver £15m. We’re now targeting £18m. PPC and affiliates have been our key areas so far. We’ve taken away marginal and unprofitable campaigns and removed unprofitable keywords. Over all we’ve removed around a thousand loss-making

• affiliates. And we’ve moved many from CPA to rev share.

External spend is a key focus and will benefit from a more co-ordinated approach across the Group. In IT terms, it’s about getting efficiencies out of our supply contracts. And we’ll reduce the number of data centres - for the UK we’ve currently got six where we should have two or possibly three. The customer service experience is continuing to improve as we fix the areas that currently cause the most pain. We'll keep simplifying the journeys to reduce the volume we have to handle. And we’re increasing our organisational effectiveness, including focusing our resourcing on our key growth areas. SLIDE 28: SUMMARY

Thank you for listening. We’ve covered a lot of ground but what I’d like you to take away is this: We’re growing in the UK again; We will start taking market share this year; We’re clear about where we want to invest – in our product, our marketing and our technology We’ll leverage our strengths to grow digital and international revenues; and We’ve got a clear plan to transform how we operate. So after all that I am sure there are some questions so over to you. [END]